Hanging Man Candlestick Pattern: Definition, Tips, and Examples

As a bearish reversal pattern, the Hanging Man is a great pattern to watch for when the price is on a downtrend. This pattern usually comes up after a series of candles going up, which we call ‘bullish’. When you see the Hanging Man, it might mean that sellers are starting to take control, suggesting that prices could drop. Price opens near the high, drops much lower, and then claws its way back toward the high. In this case,the hanging man is a white bodied candle, but candle color is unimportant.

Green vs. Red Hanging Man Pattern

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It represents sellers coming into the market and losing momentum, only to turn around and take it back. A hanging man must be at the top of a move higher to show a potential continuation of the action, only to see the continuation broken through to the bottom. This will have some traders that bought that rally to lose money, and then it causes losses for them and even causes fear – something that influences trading. A hanging man candle is an example of selling pressure coming into the market but repudiated as traders believe the overall long-term trend should continue to the upside. However, it is not technically a hanging man until we break down below the bottom of the campsite because it shows resiliency by the sellers. Hanging man means the same in stocks and other financial instruments traded at markets – the point at which the market tends to go for a bearish reversal.

What are the Best Indicators to Use with the Hanging Man?

The Hanging Man is a candlestick pattern that forms during an uptrend and signals a downtrend reversal. It indicates a sharp selling pressure increase at the top of an existing uptrend. When traders identify a Hanging Man pattern, they enter short or sell trades to profit from the expected downtrend.

1. Certain times of the year are prone to market reversals, and spotting a Hanging Man during these periods can be particularly significant.
2. That being said, understand there is rarely a “perfect setup” for a trade, so flexibility is possible.
3. The existence or not of a wick (shadow) at the bottom doesn’t matter too.
4. Another popular way of trading the Hanging Man candlestick is using the Fibonacci retracement tool.
5. The hanging man is classified as a hanging man only if an uptrend precedes it.

The Hanging Man formation is a bearish pattern with a high closing price and a long lower shadow with no upper shadow. The pattern indicates that the bears in the market are overpowering the bulls. It is easily spotted in the charts because of its extremely long lower shadow/wick. When the first Hanging Man candlestick is continued by a second long bearish candlestick, the reversal is confirmed. This pattern typically emerges at the peak of an uptrend, signaling potential bearish reversal.

Strategies

Going by the textbook definition, the shooting star should not have a lower shadow. However, a small lower shadow, as seen in the chart above, is considered alright. The shooting star is a bearish pattern; hence the prior trend should be bullish. When trading based on the bullish signal of a hammer candlestick, traders usually follow specific rules.

The hanging man is a classic candlestick pattern that is formed on various charts, including Forex. This pattern appears in the zone of local highs for Forex instruments. Western traders and investors call the hanging man pattern a bearish hammer. The chart shows that the price has formed a sequence of hanging man patterns.

The hanging man candle does not necessarily indicate the price reversal. Wait for this pattern to be confirmed by identifying other bearish patterns. If you see a candlestick with a small body, a long lower shadow, and barely any upper shadow at the end of an uptrend, you’re likely looking at a Hanging Man chart pattern. Unlike the Hanging Man pattern, which suggests a bearish reversal, Doji patterns can indicate either continuation or reversal, depending on their context and confirmation from subsequent candles. The Hanging Man and Evening Star patterns are both bearish reversal signals but differ in their structure and confirmation requirements.

Such a unique pattern allows traders to square their position to enter a short position. The reliability of the pattern in predicting price reversal depends on the follow-up candlesticks. A more bearish candlestick following the hanging man pattern affirms the uptrend has lost momentum, and sellers are likely to push prices lower. Therefore the hammer, in most cases, is a bullish reversal pattern that affirms the prospects of price correcting from a downtrend and starting to move up. While it shows strong selling during the period at the close, buyers regain control, resulting in higher prices closing. While the underlying trend doesn’t need to be bullish for the hanging candlestick to appear, there must be a price rise before the pattern appears and changes the price action direction.

What Is the Difference Between the Hanging Man and Hammer?

This information is invaluable for traders looking to identify support and resistance levels that can inform their buying and selling decisions. When trading based on the bearish signal of a hanging man, traders may follow certain trading rules. Firstly, they wait for a confirmation, such as a bearish candlestick following the setup or a price close below the low of the hanging man candle. They may enter a short trade below the low of the hanging man candle to confirm bearish sentiment and, anticipating selling pressure, place a take-profit target at the next support level. After a good bullish trend, the appearance of this hanging man candlestick pattern tells the trader that the bullish trend is losing steam and a change in trend could be setting in.

1. Firstly, they wait for a confirmation, such as a bearish candlestick following the setup or a price close below the low of the hanging man candle.
2. The psychology behind the hanging man candlestick pattern reflects a shift in market sentiment.
3. The breakout of the lower border of the ascending channel served as an additional signal to open short trades.
4. Nonetheless, the powerful push downward is the sign of signal that the bearish reversal is in the offing.
5. Antonio Di Giacomo studied at the Bessières School of Accounting in Paris, France, as well as at the Instituto Tecnológico Autónomo de México (ITAM).
6. In addition, the reversal should occur in high volume for the price to reverse course and move lower.
7. Usually, it appears after a price move to the upside and shows rejection from higher prices.

To understand the topic better, let’s study a hanging man candlestick pattern example. If you wish to trade after spotting Hanging Man pattern, you can use derivatives like CFDs. Therefore, you can open a short position based on your prediction of the asset’s price movement when Hanging Man pattern appears. Identifying resistance levels near the Hanging Man can strengthen the signal’s reliability.

It is important to emphasize that the Hanging Man pattern is a warning of potential price change, not a signal, by itself, to go short. Finally, the hanging candlestick’s highest point is the best point for a trader to place a stop-loss. Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital.